Good morning, everyone, and welcome to Lowe's Companies' Third Quarter 2017 Earnings Conference Call. This call is being recorded. [Operator Instructions] All supplemental reference slides are available on Lowe's' Investor Relations website within the investor packet. While management will not be speaking directly to the slides, these slides are meant to facilitate your review of the company's results and to be used as a reference document to the following call. During this call, management will be using certain non-GAAP financial measures. The supplemental reference slides include information about these measures and a reconciliation of the most directly comparable GAAP financial measures. Statements made during this call will include forward-looking statements, as defined in the Private Security Litigation Reform Act of 1995. Management's expectations and opinions reflected in those statements are subject to risks, and the company can give no assurance that they will prove to be correct. Those risks are described in the company's earnings release and in its filings with the Security and Exchange Commission. Hosting today's conference will be Mr. Robert Niblock, Chairman, President and Chief Executive Officer; Mr. Rick Damron, Chief Operating Officer; and Mr. Marshall Croom, Chief Financial Officer. Joining during the Q&A session will be Mr. Richard Maltsbarger, Chief Development Officer and President, International; and Mike McDermott, Chief Customer Officer. I will now turn the program over to Mr. Niblock for opening remarks. Please go ahead, sir.

Good morning, and thanks for your interest in Lowe's. This quarter, our teams were tested by the largest natural disaster response we've ever mounted, and I'm extremely proud of the way they met the challenge. Our merchant, vendor, logistics and storm teams worked together seamlessly to ensure customers had the right products to protect and repair their homes. Following the storms, our operations team worked tirelessly to get our stores up and running quickly, and over 3,000 employees generously volunteered to serve our employee relief teams, providing additional support to customers in their time of need and giving employees impacted by the hurricanes a chance to focus on their own recovery efforts. Lowe's has also provided financial support, committing over $2.5 million in disaster relief through cash and product donations. And we continue to work closely with our nonprofit partners to provide both immediate and long-term support to impacted areas. I'd like to take a moment to thank our employees for their remarkable efforts to serve their communities, help customers and support their colleagues in the face of numerous natural disasters. Turning now to our third quarter results. We delivered comparable sales growth of 5.7%, driven by a 4.8% increase in comp average ticket and transaction growth of 0.9%. Hurricane-related sales contributed 140 basis points to comp growth. Our U.S. home improvement comp was 5.1%, with positive comps in all regions and all product categories. Lumber building materials led product category growth with double-digit comps, driven by Pro demand, hurricane prep and cleanup and inflation. Appliances also posted double-digit comps, supported by our best-in-class omnichannel offering, and we achieved above-average comps in rough plumbing and electrical. We are pleased with the progress we've made to enhance our product and service offerings for the Pro customer, delivering another quarter of comps…

Thanks, Robert. It's been an honor to work besides you and our incredible Lowe's organization and management team through the various stages of my career. I'm thrilled that Richard will be stepping into this role, and I'm confident that he will further propel the company's operations and customer experience to new levels of growth and success. I look forward to working closely with Richard over the next few months to ensure a seamless transition and will be cheering Lowe's on from the sidelines in my retirement. During the quarter, we drove increased traffic in-store and online with compelling messaging and integrated omnichannel experiences, capitalizing on a supportive macroeconomic backdrop and customers' continued desire to invest in their homes. We delivered a 5.7% comp, achieving positive comps in all regions and all product categories. We drove double-digit comps in appliances, posting our best appliance comp in 7 quarters, leveraging our investment in customer experience, both in-store and online; our service advantages of same or next-day delivery and haul away and facilitation of repairs and maintenance; our best-in-class selection of leading brands; and our strong and strategic relationships with partners such as Whirlpool that we proudly announced as one of our 2017 Vendor Partners of the Year. We also achieved double-digit comps in lumber and building materials and above-average comps in plumbing and electrical. Lumber and building materials benefited from robust Pro growth, inflation and strong hurricane-related demand for plywood, pressure-treated lumber, fencing, shingles, drywall and insulation. And as hurricanes Harvey and Irma drove demand, our teams sent over 11,000 truckloads of products to impacted areas, supporting both Pro and DIY customers as they prepared for the storms and work to repair their properties afterward. For the Pro customer, we also added Account Executive ProServices, or AEPs, to the Texas and Florida…

Thanks, Rick, and good morning, everyone. Sales for the third quarter increased 6.5% to $16.8 billion, supported by total customer transaction growth of 0.7% and total average ticket growth of 5.8% to $72.63. The acquisitions of MSH and Central contributed 70 basis points of the growth in the quarter, while new stores contributed 50 basis points. The calendar shift from the 53rd week in fiscal 2016 had no impact on comp sales, but it did decrease third quarter total sales growth by approximately $60 million or 40 basis points. Comp sales were 5.7%, driven by an average ticket increase of 4.8% and transaction growth of 0.9%. Looking at monthly trends, comps were 3.9% in August, 8.2% in September and 4.5% in October. And as Rick indicated, we drove traffic in-store and online with optimized messaging and our strategic investments in integrated omnichannel experiences, capitalizing on customers' continued desire to invest in their homes. Our teams also responded to the demand generated by hurricanes Harvey and Irma this quarter, and we estimate that the storms positively impacted comp sales by approximately 140 basis points. Gross margin for the third quarter was 34.07% of sales, a decrease of 28 basis points from the third quarter of last year. And as we've grown our market share in appliances, gross margin has been impacted from both a mix and rate perspective. Additionally, there was a mix impact from hurricane-related demand. And lastly, we continue to take competitive actions, which were partially offset by benefits from value improvement as well as early results from pricing optimization efforts. SG&A for the quarter was 22.71% of sales, which leveraged 323 basis points. In last year's third quarter, we reported $462 million in noncash charges, which drove 293 basis points of the leverage for this year. Please refer…

[Operator Instructions] Your first question comes from Peter Benedict with Baird.

First is around the efforts to drive better conversion. Can you maybe help us with the key actions you're taking here in that area? How did the third quarter do relative to your expectations there? That's my first question.

Sure, Peter. Several actions that we're taking as we think about conversion. As you know, we have been able to begin tracking our traffic inside the stores. So it's first time we've got real solid data on a year-over-year comparison, which allows us to really understand what's happening inside of the stores. We're working through the optimization of our hours. As we talked about in Q3 or Q2, we invested incremental hours to really be able to maximize the opportunity to convert our traffic that we're seeing from the marketing spend investment and the traffic that it's generating. During Q3, we worked to fully deploy those hours, and we're able to achieve that by the end of the quarter as we added the incremental hours throughout the quarter. And now we continue to work on better utilization of those hours and deploying those during peak traffic times when we see the opportunity to increase our conversion more holistically. And as always, we continue to work on the training and development of our employees to meet the demands of our customers. So if I'm looking at it from that perspective, we've done a solid job in adding the hours that we committed to. Now we're working to continue to optimize those hours to customer traffic and continue to work on training and development of all of our employees to meet the needs of the customers.

Peter, this is Robert. The only thing I would add is this highlighted in my comments and progress that Rick took you through with -- that we're making on this effort was somewhat impacted by our need to redeploy resources into the hurricane-affected areas, as we spoke about. So kind of get that behind us and so it, like I said, made progress and continued to be focused on it throughout the fourth quarter.

Okay, that's helpful. And then just shifting over to some of your omnichannel stuff. Maybe talk about your delivery capabilities today, where they stand, where you think you need to take these. And also -- and you just updated commentary around buy online, pickup in-store and deliver from store, where you sit with those and where you see those going?

Yes, Peter. As it relates to -- I'll start with online, pickup and delivery from store. Those 2 aspects of omnichannel delivery have been part of our Lowes.com platform since its original launch in 1999. So it's something that we're very familiar with. From an execution standpoint, 60% of our dot-com sales are currently picked up in-store, with 40% of those customers buying incremental product when they arrive to pick up their item. Another 10% to 15% is delivered from store, with the remaining 25% to 30% being parcel. So for us, that tells a great story of the role of the store in the omnichannel environment and how our customers continue to utilize our stores for fulfillment options in our omnichannel strategy. As it relates to delivery holistically, as you know, we operate both in-house deliveries and a third-party model in order to continue to drive the capacity that we want to be able to be nimble enough to meet the changing needs of our customers. We are very pleased with our delivery programs and how our teams continue to execute against those offerings, which is evidenced by, I think, our growth in appliances, as we highlighted, which is a strong delivered category. And our teams are able to continue to meet the demands of that business and be able to drive that -- drive those sales. So we're comfortable with where we are. We continue to look at options for fulfillment. If you look at parcel, we'll be opening our first direct fulfillment center in Q3 of this year in 2018 in Nashville, and we continue to shift parcel from our stores from a fulfillment perspective.

And anything -- that's great. And then just about -- how about delivery to the Pros? What -- how are we thinking about that?

Sure. Delivery from the Pros has been part of our ongoing programs since we've been executing against the Pro initiative. We feel very comfortable with our ability to meet the needs of the Pros through various different fulfillment options. We are able to narrow delivery windows to a 2-hour time frame for our Pros when we run through the process in the program. So we feel confident that we are able to meet their needs on an ongoing basis, both within our in-house model and the third-party models. Mike Tummillo and the Pro team continue to work on options to continue to improve that from a fulfillment perspective. So we feel good about our existing ability to execute versus the Pro as well as our ongoing strategic options that we're building out to continue to meet their needs in a dynamic marketplace.

Your next question comes from Brian Nagel with Oppenheimer.

This is David Bellinger on for Brian. So a couple of questions from us. First one on the progression of comps throughout the quarter. You're coming off the strong 7.9% gain in July, and that's slowed to 3.9% in August. Can you give us more detail on what drove that? And was there more traffic versus ticket? And also, what led to the improvements in September and October? Was there some type of internal change you made or in addition to the $200 million lift from the hurricanes?

I'll take the first part. I mean, we were actually pleased with what we're seeing from in-store and online traffic in August. And as Rick mentioned, we were working on investing in increasing our associate hours for customer facing in the areas where we needed them most to ultimately help us drive better conversion. So as that played out in the quarter, we began to see that pick up in September, but a little bit soft in August.

Okay. And then just looking at the comp guidance for the year and sticking with the 3.5%. It looks like comps year-to-date are up about 4%, and that implies Q4 slowing to something below 2%. Should we read anything into that? Or is that simply conservatism in your forecast? And can you comment on the early trends into November and how that compares to what's implied in your outlook?

Okay, certainly. We think that our guidance for the quarter and for the year is appropriate and balanced as we look to invest in running the business and continue to invest in our ongoing capabilities. We are confident in our ability to drive traffic in Q4. We do expect some benefit from the hurricanes as we move into Q4 and into 2018. But one of the things again, we've been optimizing our selling hours in the stores, and still improving that, like where we are today. But again, recognize Q4, we have tough comparisons to last year. As we mentioned, weather can be kind of wildcard in the fourth quarter. So just keep those in mind as we head into Q4. As far as where we are quarter-to-date, we're just slightly ahead of our expectations for the quarter.

Dave, this is Robert. I would layer on this. As Marshall talks about tough comparisons to the prior year, keep in mind that we also slightly in the fourth quarter of last year had the benefit of hurricane Matthew and the Louisiana flooding. So we've tried to take all that into our guidance. And just to reiterate, we're seeing approximately 3.5% comps for the year is what we're looking at. So...

Your next question comes from Kate McShane with Citi.

My question is centered around the multifamily acquisitions that you made. It's helpful for you to break out the contribution of that business going forward. But I wondered if you could walk through how the integration is going and how much of a lift do you expect in your stores once it rolls out to all the Lowe's stores?

Sure, Kate. The integration, as I talked about in my opening comments, is going extremely well. The organizational aspects of the design have been implemented as we continue to work to integrate the 2 companies. And we're seeing some strong leverage from our initial business case through working to continue to harmonize our pricing and our terms with our merchants and working with Mike's organization to make sure that we're able to leverage that and continue to move forward. Our existing focus currently is to continue to work on the integration of both companies into one operating model. As I highlighted, we are -- the teams are building out a new product catalog, which will effectively improve the customer experience across both verticals. And then as we continue to move forward, we will continue to work for the in-store integration, but that is further out in the current integration plans than today. Currently, it's really focused heavily on the integration of the 2.

Okay, great. And my second question was just on the growth that you saw for ticket above $500. Was the majority of that driven by appliances? Or can you help us break down some of the bigger categories that drove that growth?

Sure, Kate. This is Mike McDermott. We continue to see great progress in the appliance business, obviously leveraging our #1 share position and the great brand portfolio and values that we're communicating to our customers. We also continue to see Pro outpace the company average, and Pro certainly is also driving significant growth in big ticket. So our project specialists, interior and exterior, continue to drive remodel and refresh business across a number of different categories. And we continue to see momentum really across the business in regard to tickets above $500.

Your next question comes from Christopher Horvers with JPMorgan.

Can you talk about the comp trends in Canada and Mexico? It seems like they did improve from the last quarter. Did RONA contribute to that comp? I think it was only in the quarter for a partial period. And can you talk about how much the FX lifted the reported total comps as well?

Yes, Chris. This is Richard. The -- we had a very strong quarter up in Canada. As Robert noted in his comments, we had a high single-digit comp within Canada, and there is a very strong contribution to that across all of the different banners. Just a small point, we actually had RONA in our comp for the entire quarter this quarter. So this will be the first quarter where all of their sales are rolled into our comp comparisons. And as Robert said, we are very strong -- we're very pleased with the progress that we're making there. We have brought our first 2 big-box evolutions live from the RONA brand into the Lowe's brand out from Western Canada. We're underway with several more now. We have expanded our appliance mix to more than 70 stores on track and above our plan in terms of rollout, given the opportunity for share in the appliance market in Canada. And we're seeing really good strong Pro results in our business in Canada, given our higher mix of the Pro across our different banners, including those specifically focused on the Pro in both Quebec and out west. Similarly, very strong, as Robert noted, double-digit comps in Mexico. I'm very proud of the team there. The team has also, to the plan that we laid out last year, had begun down the path of expansion again, having recently opened 2 new stores in the Monterrey, Mexico market and putting us well on path to our goals to double the business across 3 years.

And then the FX contribution? And then I had a follow-up.

That was fairly minor for the quarter. It was largely driven by operational results from Canada and Mexico.

Okay, understood. And then how -- I was curious how you thought about the market growth rate in the U.S. and that the census category show about 7%-ish type growth year-to-date. You're running year-to-date about 5%. And in 3Q, that gap persisted. Do you think the census is a fair estimation of the market growth rate? Do you have insights into sort of market share trends in the key categories, I think, because one of the questions that we get from investors is not per se the comp gap, but just trying to understand how your share is playing out in the United States relative to the census benchmark.

The -- Chris, certainly, I mean, it's indicator of the health of the overall market. It's not a perfect match. We look more specifically at just -- at the leading indicators from housing from home improvements. We feel really good about that. We think that leading indicators certainly remain supportive, have done a good job and income gains, driving strong growth in both disposable income and consumer spending, revolving credit usage continuing to be favorable as we mentioned it and probably most important, home price appreciation, which is driving increased housing wealth. So as we look at that, we feel good about the macro environment. We feel good about housing. We feel good about from looking at things like our Consumer Sentiment Survey, homeowners' willingness and intention to engage in projects around the home, driven by one of their views of the overall housing market is as well as views about the increasing values of their homes. So overall, we feel good about it. And as Mike said, when we look at our trajectory of comp growth, as we look at the quarterly progression that we've had through the year, the focus of the team has put behind -- improving our execution. And we're pleased with our performance and excited about the opportunity ahead of us.

Your next question comes from Charles Grom with Gordon Haskett.

This is Andrew Minora on for Chuck. I have one question on hurricane impacts. Can you guys quantify the impact on gross profit margin and SG&A from hurricanes? And I have one follow-up.

So ultimately, the gross margin impact obviously hurt our mix because it is below average company rate on the gross margin. So that certainly had an impact. We did have incremental SG&A expenses, but all told, net-net, while it was slightly positive, it wasn't a driver to our earnings for the quarter.

Okay. That's helpful. And then just on the Pro comments. I mean, it's just -- it's a little bit nitpicky, but you guys went from saying the growth is well above the company average to above the company average for the last 2 quarters. Is that more a function of the overall comp doing better last 2 quarters? Or are you seeing any slowdown in the Pro business? Any color there would be helpful.

This is Mike. What I've highlighted is we continue to see positive strength in our DIY business, which maybe tightens the balance between Pro performance and DIY. I still feel very good about our Pro performance. Team is doing a great job engaging the customer in a variety of different segments across that marketplace. Pro represents about 30% of our business, and we continue to see expanded penetration.

Your next question comes from Michael Lasser with UBS.

Can you give us some quantification of how far along you are into the competitive pricing actions you've been taking? Are you close to being done?

Michael, this is Mike McDermott again. Obviously, we're going to continue to react to the competitive intensity of the marketplace. I feel good about the actions we took coming out of the first quarter when we recognized an opportunity to improve our value perception. Team has done a great job on both base price, stock and SOS as well as our promotional pricing strategy to make sure that we are delivering those great values in the market to our customers. I also feel good about the actions the team is taking around leveraging new pricing and analytics tools and refining our pricing strategy across categories to make sure we're optimizing our effectiveness. Recognize that in the May time frame, we also drove 2 loyalty actions, which are having a positive impact. The first was our simplified approach to military recognition, offering both active and veteran military personnel the ability to enjoy 10% discounts every day. And on top of that, we launched free parcel delivery for MyLowe's members. So we're seeing both customer growth and loyalty from those actions and -- but they will have some impact as to our gross margin performance.

And are you seeing competitors respond as you take price actions?

Yes, I think the marketplace remains competitive. And what I would tell you, as I look at third quarter versus second quarter, it's consistent with our expectations. And as we go into the fourth quarter, again, I think consistent with where we were in 3Q.

Your next question comes from Simeon Gutman with Morgan Stanley.

Hello. Can you hear me?

Yes.

We can hear you now.

Sorry. Okay. I was on the different line. A follow-up to Michael's question. It's around gross margin. And in this quarter, in the slide deck, the gross margin headwind was described -- one of them was described as competitive actions. If in the first quarter you called the pricing investments, in second quarter you called the promotional activity, can we discuss what these descriptions? Are they just different ways to say the same thing? And then, Mike, just to follow up on that, can you describe what's going on in the marketplace broadly?

Yes, Simeon, what I would tell you is that you should translate both of those descriptions as the same. When you think about promotional activity, actually think about advertising and promoting value with a customer as well as some of the actions I highlighted around loyalty. So they would be in the same bucket. And as it relates to, again, the competitive environment, consistent with our expectations.

Okay. And then regarding execution, we've talked over the past 12 months, there's been some management change. There was -- we talked about some inconsistency between merchants and some of the marketing, and then you've added some labor hours back to stores. If you think about how you performed in Q3 and going forward, are the bumps more or less ironed out? And can you talk about where you could be or where you should still be getting better?

Yes, Simeon, I'll start and let the others jump in. Yes, certainly, we've made a lot of changes to set us up for the future. As I said, we're pleased with the -- our new store leadership model and what we're seeing out of that. I'm pleased with the work that's being done to try and add hours back into the stores. As Rick indicated, we'll continue to focus on getting those hours in the right kind of daypart if you wanted to focus on the high profit at times to better match with customer demand. There was certainly a little bit of an impact as we had to redeploy people to the hurricane-affected areas in the quarter. In addition to that, we've -- as we indicated earlier, we made some changes to the organizational structure here, corporate office to kind of flatten the organizational structure, improve our span of control and we're pleased with the way the team has responded and working together to focus on driving the business forward, so.

Your next question comes from Eric Bosshard with Cleveland Research.

Two things for you. First of all, the step-up in online growth the past 2 quarters. I know a component of that is easier compares to some changes you were making a year ago. But just curious if you give us a little bit more color what's driving that? And also, if there are categories that are leading that improvement? Some insight on that would be helpful.

Eric, I'll take that. We continue to see great progress as it relates to our digital performance with the 33% comp we saw for the quarter. We continue to optimize our online platform. We continue to add and invest in additional functionality, improving everything from content to our checkout process, adding visibility for the customer around inventory and order status and essentially driving more of a simple and seamless approach online. When I think about the categories that continue to perform well, appliances, fashion fixtures and seasonal outdoor living led the way as it relates to our online performance. So team's doing a great job bringing that experience to life and connecting it to our overall omnichannel platform and driving additional traffic into our stores.

Secondly, it was roughly a year ago that you all started to talk about productivity. And I'm curious now coming up on a year later within this, what the emphasis is within this now. It seems like it started with a little bit more focus on profitability. Feels like you're trying to shift to a little bit more balanced or focused on sales. But I'm just curious how you're thinking about the productivity initiatives, especially with the 2% comp in 4Q and the 3.5% in a year where the market feels like it's stronger, which way are you leaning and focusing on with the productivity initiative?

Eric, this is Marshall. Actually, yes and yes, we want both, sales productivity and SG&A productivity cost out. So those will continue to be focus areas. So if you think about some of the investments we're making from the omnichannel capabilities, we want those to be sales drivers. If you think about processes within the stores from this customer experience to services, again, trying to eliminate employee and customer pain points. But we've got good line of sight into actions one that we took this year. Rick highlighted a couple of those with indirect spend, moving the needle on how much we centralized indirect spend, along with some of the changes we've made to the payroll staffing model, the leadership changes that we made earlier in the year, along with things that we're doing from supply chain efforts to drive better productivity, reduce burden for the distribution center and stores. So all of that wrapped up into the amount of investments we've made in 2017 to be able to drive flat operating margin on an adjusted basis for 2017 and knowing that we've got future opportunity to keep getting after it from a productivity standpoint, so moving to '18 and '19 and beyond.

Your next question comes from David Schick with Consumer Edge Research.

On -- you're talking about Craftsman, and I know there's been work on merchandising around Pro. Is there any metric you can give to the amount of skew or category newness that you're introducing now versus the past?

Yes, Dave, we don't really look at it that way as it relates to new assortment. But what I can tell you is the merchants continue to work with our strategic partners across every category to make sure that we refine our assortments and expand value. Obviously, we're very excited to welcome the Craftsman brand to the Lowe's portfolio, iconic brand that customers know, innovation and high quality and value. So if you think about all the brand work that we've done over the last 4 years, adding more than 25 brands back to the portfolio, brands that DIY and Pro customers know and trust. I really think Craftsman, when it launches in 2018, will continue to propel us forward with customers in both of those segments.

Great. And then any comment on how you're thinking about the wage -- potential wage pressures on your business, just that we're observing in the economy, whether nationally or regionally would be helpful?

Yes. Again, as we think about that, obviously, there's been some wage pressure. Just one of the things that our productivity efforts are designed to help offset, along with continuing to challenge, are we rightsizing the staff and the stores and the DCs and corporate offices and always looking to balance, again, how we're getting better productivity in the processes throughout supply chain and then the appropriate mix of hours in the stores from selling and nonselling to make sure that we're appropriately flowing freight, taking care of our customers and providing the best experience that we can.

And David, I will just add that based on the model and experiences we try to create and a product knowledge required of our associates, we pay a higher average hourly rate already than the marketplace, so that helps us also mitigate that, just understanding the fact that because of the model itself, we do have a higher rate than the industry as well.

Yes. And we take a look at it, not just on the base rate, but all in from incentives and benefits to be competitive in the marketplace.

Thanks. And as always, thanks for your continued interest in Lowe's. We look forward to speaking with you, again, when we report our fourth quarter results on Wednesday, February 28. Have a great day.

This concludes today's conference call. You may now disconnect.